Soaring Profits Make EBITDA the New Way MLB Teams Spell Success (Especially the Yankees)

Forget about WAR, FIP, wOBA and other saber creations. EBITDA (earnings before Interest, Taxes, Depreciation and Amortization) is the metric baseball fans should get to know.

The Chicago Cubs won the World Series in 2016, but, using EBITDA as a barometer, the Philadelphia Phillies had the last laugh, presumably on their way to the bank. According to Forbes’ annual report on MLB finances, the fourth place Phillies led all teams with a whopping operating profit (defined by Forbes as EBITDA) of nearly $90 million. And, not only were the Phillies the most profitable team in 2016, but it also scored the highest EBITDA figure reported by Forbes since at least 2003 (Forbes has conducted the study for 20 years). In fact, four other teams would have qualified for that distinction had the Phillies not claimed the honor. In total, all but five clubs ended up in the black, with the industry as a whole topping $1 billion in profit, a 50% increase over 2015.

Top-5 and Bottom-5 Teams by Valuation, Net Revenue, EBITDA – 2016Note: Revenue for each team is net of stadium debt and revenue sharing.
Source: Forbes.com

MLB’s profit picture was boosted by continued steady revenue growth and stable cost management. Industry income of $9 billion-plus, which differs from gross figures reported by the league, represented a 7% increase from 2015, while player expenses remained relatively flat (Forbes estimates player costs are 57% of operating expenses; I have calculated player cost at just over 50% of net revenue). The rising tide of revenue also lifted nearly every boat. Only the Reds (-3%) and Royals (-10%) collected less money than last year, while eight teams enjoyed double-digit increases.

Total Player Compensation as a Percentage of Net Revenue, 2003-2016Note: Revenue is net of stadium debt service. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. Benefit costs are determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll), baseball-almanac (postseason revenue) and Forbes (net revenue)

With such healthy income statements, it’s easy to see why team valuations continued to soar across the league. In 2013, only five teams had an enterprise value above $1 billion, but now the average is $1.54 billion, a 19% jump over last year. Every team in the survey enjoyed at least a nominal bump, while all but four advanced double-digits. As a result, the relative debt levels of the league have fallen, giving each team a much more stable operating structure.

MLB Financial Snapshot, 2003-2016Note: Revenue for each team is net of stadium debt and revenue sharing.
Source: Forbes.com

For how much longer can MLB continue to enjoy such a rosy financial picture? Despite eternal handwringing over the game’s alleged declining popularity and persistent panicked predictions of a bursting bubble, teams continue to sign long-term deals with regional sports networks that lock in escalating revenue for years and even decades. It also doesn’t hurt that MLB has become almost as much of an internet technology/media company as a sports enterprise. Last year, Disney paid over $1 billion for a 33% stake in BamTech, which handles the streaming services provided by MLBAM. The rumored plan is to grow the division and then spin it off, which, if successful, would provide a windfall to all 30 teams. In the meantime, Forbes estimates the total value of MLBAM (not just BamTech) at approximately $12 billion. In other words, internet-related technology and media services represent nearly one-quarter of MLB’s enterprise value.

2016 Player Cost (Payroll/Luxury Tax) as a Percentage of Team Revenue for all 30 TeamsNote: Revenue is net of revenue sharing and stadium debt service. Payroll excludes benefits and is based on final figures for each year released by MLB, and may not necessarily equal the amount upon which the luxury tax is based.
Source: MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

Returning to the cost side, while payroll (and related expenses) have been relatively flat, there have been fluctuations among different teams. Expressed as a ratio to revenue, the scale of player costs runs from the Tigers at 73.9% to the Brewers at 27.4%, with the league average at just over 46% (excludes league-wide expenditures, such as postseason allocations). Not surprisingly, those teams at the higher end of the scale also reported the lowest operating profit, which suggests cost control could become a higher priority if revenues continue to become inelastic to success on the field.

Yankees’ Payroll/Luxury Tax as a Percentage of Team Revenue, 2001 to 2017E

Note: Revenue is based on Forbes calculations and net of revenue sharing and stadium debt service. Payroll is based on final figures for each year released by MLB, and may not necessarily equal the amount upon which the luxury tax is based. For 2017E, revenue is Forbes 2016 calculation increased by 2%, and payroll is based on a proprietary tracking calculation (see here).

Source: bizofbaseball.com and MLB releases published by AP (final payroll), MLB releases published by AP (luxury tax) and Forbes (revenue)

The Yankees are one team that has seemed to adopt a cost-driven model. In the past, the Yankees employed a win-at-all costs approach based on the belief that championships were the most important bottom line, and winning them would drive revenue. Nowadays, however, the Bronx Bombers have sought to grow the bottom line by maintaining stable revenue while reigning in player costs. As a result, despite recording only 2% income growth in 2016, one of the lowest figures in the league, the Yankees saw their operating profit triple to $39 million, the team’s highest EBITDA, according to Forbes’ data, since at least 2003.

Yankees’ Financial Snapshot, 2003-2016

Note: Revenue for each team is net of stadium debt and revenue sharing.
Source: Forbes.com

Though many believe the Yankees are saving their pennies so they can splurge on the 2018 free agent class, the team’s ability to insulate its revenue base (i.e., long-term TV rights contract with FOX-controlled YES; extended corporate season ticket accounts marketed around amenities; leverage to overall industry growth) could make ownership less likely to spend at levels commensurate with the past, especially if the team is able to remain competitive without adding high priced stars. Throw in lower debt servicing costs as a result of a recent debt re-financing and the Yankees’ bottom line could continue to grow exponentially. If that, and not adding another World Series title, becomes the priority, cheering for the Bronx Bombers really will be like rooting for U.S. Steel.

Footnotes

Forbes’ revenue figures differ from totals reported by MLB because they include ancillary stadium revenue (such as concerts and other sporting events), but exclude applicable stadium debt payments.

Forbes uses EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a measurement of operating income. Although usually defined as EBIT, Forbes not only adds back interest and taxes, but depreciation and amortization expenses as well. As a result, Forbes operating profit can appear higher than stated figures